Wells Fargo model shows deflation risk growing

The U.S. economy may prove more prone to deflation than the Federal Reserve acknowledges and that may present a reason to keep monetary policy loose, according to a model created by Wells Fargo Securities LLC.Deflationary pressures have been "relatively high" since January 2010 and now have a 66 percent chance of prevailing in the U.S., according to Charlotte, N.C.-based economists John Silvia, Azhar Iqbal and Blaire Zachary. Their calculations include factors such as the personal consumption expenditures price deflator, unemployment rate and the Fed's inflation target.The model is "useful for policy-makers, investors and consumers who can attach a probability with each more-likely scenario of future price trends: inflationary, deflationary or price stability," the economists said in a Feb. 17 report.They say that such a persistently higher probability can highlight a looming threat. In the 1980s, for example, the model would have pointed to the risks of higher inflation, which did mark that decade."The recent year's surge in the deflationary pressure probabilities may offer a justification for the highly accommodative monetary policy," the authors said in the report.The Wells Fargo model is more worrying than one created by the Federal Reserve Bank of Atlanta, which is based on the market for Treasury inflation-protected securities. As of Feb. 14, that gauge said the probability of deflation was steady at zero.Central bankers so far don't sound worried by a deflation threat. Fed Chair Janet Yellen told lawmakers on Feb. 11 that some of the recent softness in prices "reflects factors that seem likely to prove transitory."